For 2018 I’m going out on a ledge and looking for Twitter Inc (NYSE:TWTR) to defy the odds and have a good year. Twitter is one of the most polarizing stocks out there today and it elicits strong emotions on both sides of the coin. Most of the sentiment seems to be negative still, but that’s where I think we may just have an attractive investment opportunity.
We all know what Twitter is by now, and most of us are familiar with what a train wreck of an investment it has been in its short life as a public company. However I believe that co-founder and CEO Jack Dorsey is helping the company find its place in the 21st century media landscape and has a team in place that is finally ready to take this business to the next level.
Whoa Whoa Whoa, Stop the Clock
It appears management’s efforts to get the growth engine going again at Twitter are starting to pay off. Daily active users (DAU) were up 14% in the third quarter, marking the fourth consecutive quarter of double-digit growth. Monthly active users (MAU) of 330 million also grew 4 million users from a quarter ago. The nature of Twitter’s platform makes DAU a better indicator of engagement and use. While management does not disclose the number of DAUs it’s currently less than 50% of MAUs meaning there is plenty of opportunity for growth.
Total ad engagements doubled for the quarter with cost-per-engagement down 54% from a year ago. Also encouraging is that Twitter’s top 100 global advertisers spending was up 23% from the year ago. With more than 830 live streamed events in the quarter and 74% of those streamed to a global audience there is clearly something here that management is building on and continued focus on machine learning will help stoke organic discovery and ideally bring relevant, personalized content to the top for all users.
Expenses tracked down 16% from a year ago and at less than 20% of revenue now stock based compensation (SBC) is slowly but surely coming under control. Old advertising partners are coming back and new partners are coming on board as management is demonstrating more attractive ROI on newer advertising products thanks to the focus on video and other platform improvements.
For now investors are stuck with revenue projections and “adjusted EBITDA” for earnings which is about as comforting as a visit to the proctologist. On a price to sales basis Twitter shares are trading at a multiple of about 6.5 versus Facebook’s 13.5 and Snap’s (cough) 25.5.
According to Capital IQ estimates analysts on average expect Twitter to bring in a bit over $2.5 billion in revenue in 2018, just a tad more than what it recorded in 2016 but most definitely a reacceleration from 2017’s likely numbers. If it can hit or beat this mark, continue to bring down stock-based compensation and become profitable, well let’s just say I like the chances of the market paying a little bit more for a growing business that’s actually making some money in the process.
Hit ‘em with the Hein!
Get (GAAP) profitable – Management noted in the most recent earnings release that for the current (fourth) quarter, “We also expect that at the high end of our adjusted EBITDA range, we will likely be GAAP profitable.” Now whether they achieve this in the current quarter or not, it needs to happen in 2018. Once the business gets to real profitability we’ll have a whole new way of looking at the potential value these shares may offer.
SBC easy as 123 — One of the biggest targets on Twitter’s back (and rightly so) has been stock-based compensation (SBC). While it’s nothing new for tech companies to go public and use stock as a form of compensation in the early days, this is a real expense and Twitter’s record here has been atrocious. However it is getting better.
When Dorsey jumped back in as CEO in September 2015, he made bringing SBC back to a level more comparable with the company’s peers a key point of focus and as you can see in the chart below the picture is improving:
Remember, the market is a forward-looking mechanism and it will continue to give management more credit if this trend continues. And assuming management is able to re-accelerate the top line as they say they will, the combination of that coupled with declining SBC will serve as a nice boost to the bottom line.
Engage and discover — Management must continue to iterate and bringing new features for users. They are doing a good job bringing more focus to the DAU metric but they need to keep their foot on the gas.
I’m still concerned that they are simply not doing a good enough job on the discovery side of things when it comes to live video but I’m hopeful that will improve in 2018. Recent releases such as doubling the character count to 280 as well as threads show that there are no sacred cows and that leadership is quite open to change when the data support it. And TicToc, the 24/7 news network in conjunction with Bloomberg has a lot of potential as well.
It wasn’t all that long ago when people were calling Twitter “dead.” Well to steal a line from Mark Twain, the reports of Twitter’s death are greatly exaggerated. Yes, the business has been a mess since going public and yes, this has resulted in a dismal investment thus far. But there is no denying the power of this network and as the operating system of news it’s proving quite difficult to disrupt.
While Twitter will never boast the user numbers of something like Facebook, I don’t think it has to. As long as leadership continues to seek input from its users and clients and build new features that stoke engagement Twitter could be a decent little business.
And with as hated as the stock is by so many today, 2018 could very well mark the first chapter of a new story for the company and its shareholders.
As of this writing, Jason Moser held shares of TWTR.